**••*
HD28
.M414
no.
SI
|MAY
9
1991
EARNINGS AIJD RISK CHANGES
SURROUNDING PRIMARY STOCK OFFERS
Paul M. Healy
School of Management, M.I.T.
EARNINGS AND RISK CHANGES
SURROUNDING PRIMARY STOCK OFFERS
Paul M. Healy
School of Management, M.I.T.
Krishna G. Palepu
Harvard Business School
January 1989
Forthcoming: Journal of Accounting Research
We
wish to thank Andrew Christie, Bob Kaplan, Richard Leftwich. Maureen McNichols, Stewart
Myers, Pat O'Brien, Richard Ruback, and the participants of workshops at Carnegie-Mellon
University of Minnesota, and
University, Columbia University, Cornell University, M.I.T.
,
NBER
for
comments on
the paper.
We owe
special thanks to Jim Patell, the referee, for his
valuable suggestions which significantly improved the paper.
making their sample available for
assistance. The paper has been funded by the Division
David Mullins
for
of
We
also thank Paul Asquith and
paper and Eileen Pike for research
Research, Harvard Business School.
this
ABSTRACT
This paper investigates the nature of the information conveyed by primary equity offer
The results are as follows. (1) Offer announcements appear to convey information
decisions.
about future
in
risk
changes since they are accompanied by increases
financial leverage, the net effect of
equity betas
which
is
to
increase
in
asset betas, and decreases
equity betas.
On average
the
consistent with the average stock price reaction to the offer
The risk information conveyed by equity offers is firm-specific since
announcement.
(2)
other firms in the offer firms" industries do not experience similar risk and leverage changes.
increase
in
is
do not convey new information about offer firms' future earnings levels.
managers deciding to issue equity and reduce financial
leverage when they foresee an increase in volatility of their firms' earnings due to an increased
business risk.
Firms' stated reasons for equity offers, and post-offer earnings volatility
support this interpretation. Investors, recognizing that managers have superior information on
their firms' prospects, interpret offer announcements accordingly and revise the offer firms'
(3)
Equity offers
These
results
are consistent with
asset and equity betas upward, resulting
in
a negative market reaction.
1.
INTRODUCTION
Several recent studies, including Asquith and Mullins [1986], Masulis and Korwar
[1986], Mikkleson
and Partch [1986], and Schipper and Smith [1986], document stock
declines at seasoned equity offer announcements.
declines
is
that
managers' equity
Our paper examines
prospects. I
offer decisions
this
One
explanation proposed for these price
convey new information
We
unsystematic
find that
risk,
leverage following the
On average
the offer
and
is
effect of
offer firms
do not lower
is
about changes
in
when
firms also
in
asset and equity betas,
show a decrease
these changes
is
their post-offer
asset
their financial
to increase offer firms' equity
in
earnings following the offers
earnings forecasts
for
do convey new information
the riskiness rather than
is
in
in
consistent with the average stock price reaction to
do not have a decline
interpretation of these findings
financial leverage
Investors,
The sample
The net
results indicate that equity offers
the information
One
The
firms'
earnings levels, and analysts' earnings forecasts.
the equity beta increase
financial analysts
flows.
offer.
announcement.
These
on
our sample of equity offer firms experiences a significant increase
betas subsequent to the offers.
betas.
to investors
hypothesis and provides evidence on the nature of the
information revealed by equity offers by analyzing post-offer changes
financial leverage,
price
that
changes
managers decide
they foresee an unexpected increase
in
in
these firms.
to investors,
and
that
the level of future cash
to issue equity
their firms'
and reduce
business
risk.
recognizing thai managers have superior information on the firms' prospects,
interpret equity offer decisions accordingly
and revise the
offer firms' asset
and equity betas
upward.
Section 2 of the paper discusses prior theoretical work on equity offers and develops the
hypotheses tested
section 3.
Section 4 examines changes
changes following equity
changes subsequent
presented
2.
The sample and data
the paper.
in
in
section
to
6,
in
collected for the tests are described
analysts' earnings forecasts, as well
as actual earnings
Section 5 presents tests and results of asset and
offers.
in
financial
risk
Discussion and interpretation of the results are
equity offerings.
and section 7 summarizes the conclusions.
NATURE OF INFORMATION CONVEYED BY EQUITY OFFERS
Review of Prior Work
2.1
In
section
this
hypotheses tested
in
we
discuss three prominent models of equity issues to motivate the
the paper.
The models assume
that
managers
act in the interests of their
shareholders, and argue that an equity offer announcement provides information to the capital
market only
nature
of
if
the
managers are
information
assumptions about how the
better informed than investors.
offer
investments, or to fund shortfalls
When
that,
structure
proceeds are used
in
-
to retire existing
in firms'
capital structure.
debt, to finance
new
Donaldson (1961), and DeAngelo and Masulis [1980]
allowing for taxes and positive costs of financial distress, the optimal capital
decision for a firm involves balancing
the
potential
risk,
and hence more
tax benefits from
increased
Firms which expect high and stable profits are
borrow more because they can use the interest tax shields.
business
models analyze the
operating cash flows.
leverage against financial distress costs. 2
to
three
the proceeds are used to retire debt, equity offers reveal information to investors
about changes
argue
The
revealed by equity offer announcements by making different
volatile profits,
Conversely, firms with high
are likely to borrow less
because
borrowing increases expected financial distress costs more than the expected benefits.
firm's capital structure is
determined by
its
likely
managers' expectations
of the level
additional
Thus, a
and riskiness
of
its
Masulis [1983] extends this analysis and argues that,
future earnings.
information asymmetry between
and managers choose
managers and investors regarding
leverage indicates to investors a change
earnings
If
to
be
show
place.
In their
new
volatile
Managers
and
to act
in
are
assumed
on whether the
firm
is
a claim on the
firm's future
project,
managers
is
In
to investors'
new
on the value of
project against potential
given managers' superior information
Myers and Majluf show
over- or undervalued.
and on
deciding whether to issue equity
trade-off the value of the
new stockholders
of firms' assets-in-
firm's assets-in-place
have information superior
to
the interests of existing shareholders.
wealth transfers between existing and
when
change
than previously anticipated.
model, a seasoned equity offering
and undertake the new
interpret
managers expect the
indicate that
to
Hence, a leverage-
managers' expectations. 3
announcements convey information about the value
that offer
project.*
the firm,
more
will
is
the proceeds of equity offers are used to fund capital expenditures, Myers and Majluf
(1984)
a
either lower or
in
there
the firm's future prospects,
maximize shareholders' wealth, a decision
capital structure to
decreasing equity issue announcement
if
an equity offering as bad news, since managers are more
that investors then
likely to sell
new
equity
they expect the cash flows generated by existing assets to be lower, or riskier than
anticipated by the market.
The
flows.
third
Miller
use of equity offer proceeds
and Rock [1985] examine
investment policies are
fixed,
is
the financing of shortfalls
assuming the
situation,
and managers have
current period's operating cash flows.
equity offer
this
is
Given the
firm's
operating cash
financing
and
superior information to investors on the
identity
between cash sources and uses, an
interpreted by investors as indicating that
their forecast of the firm's earnings.
in
managers have revised downward
To conclude, Masulis [1983] and Myers and
announcements convey information
earnings.
Miller
to
Two
Korwar [1986]) attempt
to
[1985)
predict
that
offer
investors about either the level or riskiness of future
and Rock's (1985] prediction
the level of earnings.
Majluf
is
more
specific, that the information
empirical studies (Mikkleson
is
about
and Partch [1986], and Masulis and
Since
provide evidence on these predictions.
it
is
difficult
observe directly the information revealed by managers when they announce an equity
to
offer,
these studies examine the cross-sectional relation between stock price effects at the offer
announcement
possibly
and proxies
for
managers' private information.
because the variables used
in
Their findings are inconclusive,
the cross-sectional analysis are
weak proxies
for
managers' private information. s
2.2
Research Design and Hypotheses
Our research design
realized earnings and
inferred
risk
by the market
announcement
is
differs
changes
from those of previous empirical studies.
at the time of the offer
announcement.
based on an unbiased estimate
subsequent realizations
of
of future
The observed stock
If
the price revision at an offer
earnings and/or
price decline at the offer
therefore can be attributed to either an expected decrease
in total
examine
risk
changes,
these variables provide direct evidence on the nature of the
information inferred by the market.
expected increase
We
subsequent to equity offerings as proxies for the information
equity risk.
Our empirical
tests are
in
announcement
post-offer earnings,
designed
to distinguish
or an
between
these two alternatives.
To
levels,
test
whether the information conveyed by equity offers
we examine
is
about future earnings
realizations of offer firms' earnings relative to both
earnings, and the post-offer earnings of their industries.
We
their
own
pre-offer
also analyze post-offer revisions
in
analysts* forecasts.
H1A:
There
The
following fiypotheses are tested for the offer firms:
a decrease
is
in
earnings subsequent
to
equity offer announcements, either
relative to pre-offer earnings, or relative to post-offer industry earnings.
H1B:
There is a downward revision
announcements.
To
investigate whether offer
examine changes
returns to
in
in
analysts' earnings forecasts subsequent to equity offer
announcements convey information about
returns.
in
firm-specific risk,
Re = a +
where, Re and
(equity
we use
in
total
stock
equity
the variability of market
in
Since the excess returns that follow equity offer announcements are firm-specific,
they cannot be attributed to changes
changes
A change
the riskiness of equity cash flows.
variance can be due to either a firm-specific change, or a change
risk,
beta)
Rm
PeRm
in
market variance.
measured using
Our
+ e
(1)
are the returns on a firm's stock and the market portfolio respectively;
uncorrelated with the market, and
is
e is the
component
normally distributed with zero
variance of equity returns, Var (Rg), can then be
decomposed as
Var(Re) = P£2Var (Rm) + a2
is
unsystematic equity
components
respectively.
The
cz,
Po
of stock returns that is
mean and
variance a2. The
follows:
(2)
the variance of market returns,
risk
on
the two-parameter market model:
are firm-specific parameters; and
where Var (Rm)
tests therefore focus only
peando^
are measures of systematic and
following hypotheses regarding the firm-specific
of equity risk are tested for the offer firms:
H2A:
H2B:
There
is
an increase
There is an increase
announcements.
Increases
leverage.
It
is
in
the residual variance of stock returns
in
equity beta can arise from increases
in
of the offer
is
investors expect an equity offer
to
to
reduce a
the interest of stockholders,
at the offer
any, are therefore expected to be
To analyze
a firm's debt
due
to
either asset beta or financial
riskless,
its
However,
if
in
announcement.
we use
in
increase
In
in
in
actually
financial leverage
in
cannot explain the
Post-offer equity beta increases,
if
Hamada
the framework of
[1972]
who notes
(3)
of assets
systematic risk of the firm's assets (business
Any increase
will
equity beta can be written as:
where V and E are the market values
is
possible, however, that
managers make financing decisions
Pe = Pa{V/E)
following hypothesis
is
It
asset beta increases.
post-offer asset betas,
is
firm's leverage.
expectations of an increase
negative stock price reaction
H3:
to equity offer
be accompanied by subsequent borrowing which
increase the firm's leverage and equity beta.
if
in
subsequent
unlikely that equity offers signal an increase in financial leverage since the
immediate effect
that
announcements.
equity betas subsequent to equity offer
and equity respectively.
risk),
and V/E
reflects
its
Pa
represents the
financial risk.
The
tested for the offer firms:
post-offer equity betas
is
due
to
an increase
in
asset betas rather than an
financial leverage.
addition to testing hypotheses H1- H3,
we perform two
further tests.
the volatility of post-offer earnings are analyzed to corroborate tests of
First,
changes
changes
in
stock
Second, the stated and actual uses
return risk.
proceeds are examined
of offer
understand the
to
reasons why firms issue equity.
3.
DATA
Our equity issue sample comprises the
their
[1986]
Mullins
examined Moody's
sample
of stock offerings.
firm,
are included
Industrial
on the
ASE
or
NYSE
SEC;
of voting stock;
to the pre-offer equity
first
if
time of the offering;
(5)
is
the offering
for
value of the firm
offer
if
there
additional data for each of the 93
to
(2) the offering is public,
common
stock alone;
announcement
are
is
is
for five
multiple
the offer
sample
years before and
immediately preceding the offer announcement;
the
in
the
reported
ratio of offer
offers
within
five
after a stock issue,
0);
(3)
(2)
the annual
This
years.
We
we
restriction
collect the following
firms: (1) stock return data for
announcement date (day
(4)
12.5%.
eliminates 35 of the 128 offers examined by Asquith and Mullins.7
relative
to select their initial
they meet the following requirements:
(3) the offering
Since our tests examine earnings data
use only the
years 1963 to 1981
Asquith and
which the proceeds are received by the issuing
at the
and
used by Asquith and Mullins
equity offerings. e
Asquith and Mullins report that for their sample the average
Wall Street Journal.
proceeds
for
for the
sample of 128 firms
underwritten and registered with the
has only one class
Manuals
Primary offers,
the final
in
(1) the firm is listed
firm
industrial firms
study of the stock price effects of primary
in
days -850
to
+600
earnings announcement
earnings per share before extraordinary
items and discontinued operations for the six annual earnings announcements prior to the offer
announcement (years
(4)
-6 to -1)
and the
five
subsequent annual announcements (years
analysts' quarterly earnings forecasts reported immediately before
and
after
to 4);
the equity
offer
announcement;
capital expenditures
(5)
intended uses of the issue's proceeds
and acquisitions, net changes
stock issues net of repurchases
in
years
short-
in
and
-5 to 4;
(7)
at the offer
announcennent;
and long-term debt, and
the
book value
(6)
common
of debt (short-term
debt plus long-term debt), and the market values of shareholders' equity at the end of years -3
to 2.
The stock
measures
-350
year.
in
return data are collected from
year -3 (days -850
year
to -101),
1
-601),
to
CRSP
year -2
files,
and are used
(days -600
to
-351),
to align the
financial data are taken from
Compustat
Industrial
and Research
forecasts are collected from Value Line Investment Survey.
proceeds are taken from the Wall Street Journal and
frequent years of offerings are 1980 (23%), 1981
risk-adjusted
announcement
respectively, both significant at the
approximately
25%
of the
large negative outliers.
The
1%
magnitude
have negative announcement
Smith [1986].
Files.
(days
returns
level. 8
Analysts' earnings
Intended uses of the offerings'
offering prospectuseis.
On average,
this
mean
results are similar to those
-3.1%
reduction
in
return
is
and
-2.0%
equity value
is
sample firms
not driven by a few
of earlier studies
tests reported in the following sections provide
the information implied by this price decline.
are
Eighty-five per cent of the
returns, indicating that the
These
sample
the
The most
The mean and
(14%) and 1976 (11%).
for
of the offer.
to
Earnings and other
presents the distribution of the 93 sample primary offerings by year.
1
-1
earnings announcements relative
the equity offer dates, are obtained from the Walt Street Journal Index.
median
year
(days 101 to 350) and year 2 (days 351 to 600) relative to the offer
The earnings announcement dates, used
Table
estimate risk
to
summarized
in
evidence on the nature of
9
4.
CHANGES
INFORMATION CONVEYED BY EQUITY OFFERS ON EARNINGS
Evidence on Time-Series of Actual Earnings Changes
4,1
To
test
whether equity offers convey information about subsequent earnings declines,
examine earnings changes surrounding the
computed
for
sample firms
in
years -5
offer
to 4.9
these years are expressed as a percentage of
the
common
stock offering,
earnings change
for firm
j
Pj,
in
its
earnings per share
in
stock price two days before the
year
t
,
AEjt, is
4
t=-5
Industry
in
the
for the offer firms' industries for
same
these
same
firm in
announcement
of
The standardized
we
median standardized earnings are estimated
for
also estimate
for
years -5 to 4
Industrial
each
median
For each offer
fiscal years.
SIC code on the 1986 Compustat
four digit
each
(4)
standardized earnings changes, as defined above, are computed
other firms
firms.
for
defined as:
the effect of clustering of equity offers over time,
earnings changes
firm,
Changes
Annual earn'ngs changes are
so that results can be aggregated across
AEj, = (Ei,-Ej.t.i)/Pj.
To assess
announcements.
we
for all
and Research
offer firm
files.
and year, where
industry-adjusted standardized earnings changes for a firm are computed as the difference
between
its
standardized earnings changes and
Summary
in
Panel
A
statistics
of Table 2.
significance of the
Student
earnings changes for the
stock price increase
in
industry medians.
on standardized earnings changes
t
and Wilcoxon Signed Rank
mean and median values
conventional levels
its
equity
years -5
for offering
issue
to -1.
firms
respectively.
for the offering firms
tests are
used
to
This earnings growth
in
statistical
The mean and median standardized
sample are generally positive and
documented
are reported
assess the
is
significant
at
consistent with the pre-offer
earlier studies.
There
is,
however, no
10
evidence that offering firms have systematic earnings declines subsequent
the
in
mean
earnings changes
the pre-offer years.
Summary
Table
Similarly, the
statistics
in
and
years
2,
The
test firms
changes than
There
have
years
0, 2
projects with earnings payoffs
to decline, since the
in
5%
and
4.2
means
positive in years 0, 2
level or better)
3, inconsistent with the
earnings.
increase
We
beyond
the
in
If
earnings
will
in
5%
and
3.
Panel B of
level for
all
median earnings
hypothesis that equity
decline.io
the cash proceeds of the stock issue are invested
five years,
number
check the
of
earnings per share
shares
sensitivity of
may
to
in
years
to
4 are
in
likely
not be offset by a corresponding
our results to
analysis using restated earnings per share data for years
of shares.
In fact,
a potential bias from using earnings per share rather than total earnings to
compute standardized earnings changes.
increase
to the offers.
as large as the
are insignificant at the
significantly higher (at the
to investors the information that post-offer
is
is
at least
on industry-adjusted earnings changes are reported
their industries in
convey
and are
median earnings growth
The mean industry-adjusted earnings changes
2.
years.
offers
are positive
this bias
by repeating the
4 based on the pre-offer number
The conclusions are unchanged.
Evidence on Revisions
in
Analysts' Earnings Forecasts
Value Line Investment Survey's quarterly earnings forecast revisions are examined as
an alternative
information.
i^
test of the
hypothesis that equity offer announcements convey negative earnings
Depending on the
quarters for which forecasts are
fiscal quarter in
made
forecasts each quarter to incorporate
announcement.
which the report
varies from two to six.
new
is
issued, the
number
of
Value Line revises these
information, including the
most recent earnings
1
From Value Line reports issued immediately before
collect earnings forecasts for quarter
5,
depending on data
quarters
1
to
{\he quarter of
tfie
announcement) and
5 are collected from the subsequent Value Line report. ^z
standardized forecast error for quarter
is
for quarters
For each
to
1
and revised forecasts
Actual earnings for quarter
availability.
we
the equity offer announcement,
for
firm, the
the difference between actual and forecasted
earnings, deflated by the firm's stock price two days prior to the equity offer announcement;
standardized forecast revisions
in
earnings forecasts deflated by the
Summary
quarters
1
to
statistics
quarters
same
1
to 5 are differences
stock price.
on standardized forecast
5 are reported
in
Table
3.
Data
The mean standardized
significant at less than the
1%
level.
less than the
in
1%
level
Thus, except
The mean
The
and revisions
errors for quarter
for
computing forecast errors are available
for
71 of the sample firms. 13
insignificant at conventional levels.
between pre- and post-offer
forecast error
in
quarter
forecast revisions
in
quarters
revision for quarter 3
for quarter 3, there is
is
0.21% and
is
1. 2,
-0.16% and
is
for
is
4 and 5 are
significant at
no evidence of a downward revision
analysts' earnings forecasts following the equity offering.
These
forecast
revisions
incorporate
information
announcements, but also from the earnings announcements
analysts revise earnings forecasts
in
response
standardized earnings forecast revisions
return
and the standardized forecast
in
to
not
only
equity offer
The
equity
To
offer
whether
test
announcements, we regress
each quarter on the equity
error in quarter 0.
from
for quarter 0.
coefficient
offer
announcement
on the equity
offer
announcement
return reflects the earnings information provided by the offer, after controlling
for information
from the forecast error
is
insignificant at the
5%
level in
each
in
quarter 0.
The equity
offer
announcement
of the cross-sectional regressions for quarters
coefficient
1
to S.'*
12
4.3
Summary
These
subsequent
to
the offer announcement, relative either to prior years' earnings or to the firms'
industry earnings.
Further, there
by reducing earnings forecasts
equity offer
is
no evidence that analysts respond
for quarters
subsequent
Therefore,
to the offer.
announcements do not convey information about declines
Tests of
changes
risk information
the systematic
in
examined.
Next, the
analyzed.
Finally,
5.1
in
announcements
we conclude
that
future earnings.
to
in
in
these components,
sample
firm using the
prior (years -3 to -1)
of equity systematic risk,
we
in
in
years -3
to
i.e.,
First,
risk
are
asset and financial risks, are
in
Variance
post-offer firm-specific stock return variance
To examine changes
either equity beta or residua! return variance.
estimate the equity beta and unsystematic
market model
in
equation
This model
(1).
and two years subsequent (years
also evaluate whether there are
offer firms' industries.
of firm-specific equity
Equity Beta and Residual Return
using daily stock returns for the firm and the
We
three stages.
in
cross-sectional earnings volatility are investigated.
section 2, an increase
an increase
offers are presented
and unsystematic components
Evidence on Changes
can be due
conveyed by equity
components
changes
As discussed
for
to offer
RISK INFORMATION CONVEYED BY EQUITY OFFERS
5.
in
do not have systematic earnings declines
findings indicate that equity offer firms
CRSP
changes
1
and
2)
is
risk
(
Peanda^)
for
each
estimated for three years
to the offer
announcement
equally-weighted market portfolio. is
in
systematic and unsystematic
risk for the
For each test firm, equity betas and residual variances are computed
2 for other firms
in
the
same
four digit
SIC code on the 1986 Compustat
13
Industrial
and Research
offer firm
and year.
To
changes
test
betas
in
years
computed
offer firms' systematic equity risk,
in
we compute
t
each
we compute
statistics to test
A Z
these years are significantly different from zero.
each year using the sample
for
computed as
statistics are
in
of these variables are then estimated for
For each offer firm
-2 to 2.
whether the estimated beta changes
statistic is
means
whether there are changes
their
in
Industry
files.
distribution of estimated
t
statistics.
The Z
follows:
N
Z =
(1/ n'N
I
)
tj
/Aj/(kj-2)
(5)
j=1
where,
=
tj
The
Limit
of N.
beta
t
kj
= degrees of freedom
N
=
number
is
j
Theorem, the sum
The Z
for
year
statistic is
t
(t
statistic is
test
t
t
Wilcoxon Signed Rank
mean and median
each
in
years -2
to 2;
Under the Central
with variance kj/(kj-2).
normally with a variance
statistics is distributed
significantly different
whether there
j
sample.
zero. is
is
years -2
for
equity beta for firm
and
distributed Student
changes are
computed
in
a standard normal variate under the
= -2 to 2)
different from zero in
j;
of the standardized
evaluate whether the
To
for firm
of firms in the
statistic for firm
the median beta
to
estimates of the change
statistic for
t
from zero.
beta changes
null
hypothesis that the change
statistics
are used to test whether
The same
for the
in
test statistics are
used
offer firms' industries are
to 2.
is
a significant change
firm in years -2 to 2.
in
The
market model residual variances, an F
significance of the
sample
distribution
14
each year
of these statistics in
is
tested using the following Chi-Squared statistic:
N
X2
-21
=
In pj
(6)
J=1
where
firms
the probability associated with the F statistic for firm
Pj is
Under
the sample.
in
degrees
The same procedure
freedom.
of
sample
the null hypothesis that the
no different from that expected by chance,
j,
and N
used
the
distribution of the
this statistic is distributed
is
is
F
number
of
statistics is
Chi-Squared with 2N
to test the significance of the
changes
in
residual variances of the offer firms' industries in years -2 to 2.
Summary
are reported
in
year
-1
in
to
median value
statistics for
A
Panel
1.33
in
year
is
10%
level.
The beta change
estimates from year
r\/lean
also reported
1
is
There
level.
1
to 2
is
also
in
1%
in
Panel
in
A
of
This change
does not appear
not significant at the
Table
4.
is
is
to
significant at the
5%
level.
a similar increase
level.
not
due
in
Thus, consistent with
increases
to non-stationarity of the
-1
the
beta
are not significant at the
in
level. ^^
betas
in
Equity offer firms
'•s
is
be temporary since the mean change
5%
the pre- and post-offer periods.
0.06 which
betas of the offer firms
risk of the offering firms
estimates for years -2 and
and median equity betas and changes
industries, both
year
1%
evidence that the systematic equity
mean changes
in
equity beta of the offer firms increases from 1.23
significant at the
the year subsequent to the equity offer.
estimates since the
in
1,
The mean
4.
of beta in these years, also significant at the
hypothesis H2A, there
in
estimates of equity betas and changes
Table
of
in
for the offer firms' industries are
general have larger betas than their
The mean beta change
for the industries
However, the median beta change
in this
15
year
is
only 0.01, insignificant at the
10%
the offer firms cannot
Summary
firms
and
be explained
their industries in
(median) residual variance
reliable difference
These
level.
statistics for
is
about 0.05% (0.04%)
in
all
in
Panel B of Table
There
years.
five
is
for the
4.
no
unchanged during
period.
;his
do not experience changes
H2B. There
to
increase
the unsystematic risk of the offer firms' industries
offer, inconsistent with
is
in
statistically
The evidence
their
in
asset-pricing model,
Industry
therefore
unsystematic
also no evidence that there
risk
is
an
these years.
in
significance of the magnitude of the equity beta increases for the offer
documented above can be assessed using a simple valuation model. Assuming
flows are constant
sample
The mean
distribution of residual variance across year.
subsequent
firms
other years are
by industry factors.
years -3 to 2 are reported
between the sample
The economic
all
estimates of the market model residual variances
indicates that the equity offering firms
in
in
influenced
is
results indicate that the post-offer beta increases for
entirely
residual variances also remain generally
an equity
mean change
the
level, indicating that
The mean and median changes
by a few extreme observations.
insignificant at the
10%
perpetuity, the discount rate
and the
risk-free rate
constant, the percentage decline
(R()
is
cash
determined by the two-parameter capitai-
and expected
stock price given a change
in
that
risk
in
premium (E(Rm)
equity beta (R|APe)
-
R() are
will
be as
follows:
-APe(E(R^)
RlApe
-
(7)
R(+Pep(E(Rm)
where. E(Rm)
R,)
=
is
-
Rt)
the expected return on the market. Ape
'S
the
change
in
equity beta,
and p^j
is
16
Between years
the post-offer equity beta.
offering firms increases from
betas.
If
the
market
1.23 to 1.33.
premium
risk
4%
the
1
Consider a
5.6% stock
7.8% as
to
and
8%, and the
is
implies that this beta increase leads to a
predicted to range from
-1
the
Thus, on average, the observed change
in
mean
risk-free
rate
price decline. i^
assumed
of equity
these pre- and post-offer
firm with
is
5%, expression
The stock
risk-free rate varies
sample
the betas of our
sample
Pe for our
price decline
from
firms
is
(7)
10%
to
is
0%.
approximately
consistent with the magnitude of the stock price reaction to equity offerings.20
To see whether the observed
risk
changes are
investors by the equity offer announcement,
between the valuation
announcement
the equity offer
zero
at the
5%
These
level.
change, computed
The
return. 21
results could
each
to
correlations
firm using equation (7),
and
correlations are not significantly different from
be due
error. 22
An
alternative explanation
but unrelated to the equity offer announcement.
interpretations,
for
conveyed
measurement
to
errors, since the valuation
changes are computed using a simple model, and betas themselves are
effects of equity beta
estimated with
effect of the risk
related to the information
we examine Pearson and Spearman
we examine managers'
is
that the beta
To provide
change
is
contemporaneous
additional evidence
stated motivations for the offers
in
on these
section 6 of the
paper.
5.2
Changes
in
Increases
leverage.
above
is
Asset Betas and Financial Leverage
in
equity betas can arise from increases
However, as noted
expected
to
be due
To provide evidence on
to
in
in
either asset risk or financial
hypothesis H3, the post-offer equity beta increase documented
an increase
this hypothesis,
in
asset
risk
we decompose
and not an increase
in
financial leverage.
offer firms' equity betas into asset betas
7
1
and
financial leverage.
Financial leverage, the ratio of a firm's total value to the value of
for
of
each sample
common
The value
firm for years -3 to 2.
sum
firm is the
and
of the value of equity
at the
book values
the
measured using
of equity is
stock plus the book value of preferred stock
end
of the year.
of short-term
Asset betas are computed by unlevering equity betas using equation
We
also evaluate whether there are changes
for
other firms
in
same
the
Industrial
and Research
offer firm
and year.
four digit
Industry
Files.
Mean and median
years -3
to -1,
A
0.94.
1%
level,
and appears
in
years -3
matched by the other
in
year
to -1.
firms
19%
to
(3) in section 2.
leverage and asset
of these variables are then
2, significant at
0.94
to
for the
in
in
1%
years -3 to
The mean asset betas
in
year
1.
This increase
for
is
each
for
and
asset betas for the test firms
their
are stable
mean
asset
statistically
year 2
is
also
offer firms are similar to those for their
asset betas for the offer firms
their industries.
the
in
the
risk for
computed
be permanent since the mean beta
The increase
in
of the
and long-term debt.
Consistent with hypothesis H3, the
ranging from 0.73 to 0.78.
The mean and median asset betas
industries
betas
means
of Table 5 for years -3 to 2.
beta for the offer firms increases by
significant at the
The value
SIC code on the 1985 Standard and Poor's Compustat
asset betas and changes
industries are reported in Panel
in
in financial
computed
is
the market value
For each test firm asset betas and leverage are computed
offer firms' industries.
2
equity,
its
While there
level, the offer firms
still
is
an increase
in
in
year
1
is
not
industry asset
have higher asset betas.
18
Mean and median
financial leverage
presented
their industries are
differences between the
and change
Panel B of Table 5
in
mean and median
patterns.
from zero
in
The median leverage changes
years -2 and
decreases from 1.50
in
in
equity beta
matched by
5.3
to
in
we
to
year
1%
year
consider
to
their industries.
The median
2 and the median changes
in
and
There are some
2.
The
be more representative of the
for the offer firms are not significantly different
In
The decrease
1
median leverage
the
1,
of the offer firms
Thus, consistent with H3. there
level.
can be
attributed to
an increase
the offer firms' leverage
in
to
year
in
is
no
in test firms'
1.41,
still
is
not
1
industry leverage remains about 1.55 during the
years -2 to 2 are insignificant at the
10%
level.23
Evidence on Post-Offer Earnings Volatility
To corroborate the increase
in
asset betas documented above,
standardized earnings changes (as defined
equity offer
number
announcements.
of time-series
rather than
Since
time-series
data.24
significance of year-to-year
The variances and
the pre-offer values.
in
equation
we examine a
observations per firm
is
(4)
in
sample
Therefore,
the volatility of
surrounding the
section 4.1)
relatively recent
limited.
we examine
of equity offers, the
we use
cross-sectional
Cross-sectional variances and interquartile ranges for the
standardized variables are computed
in
years -3
year 2 the median leverage of the offer firms increases
lower than the pre-offer level.
years -3
level.
to 1.36, significant at the
evidence that the increase
financial leverage,
5%
at the
-1
for
for the equity offer firms
results, due a few extreme observations.
following discussion focuses on medians, which
sample
leverage
in
changes
in
interquartile
in
years -5
variances.
to
4 and an F test
The
is
0.07%
in
used
to
evaluate the
results are reported in Table 6.
ranges subsequent
The variance, which
is
to the offer are generally larger
year
-1,
increases threefold
the year of the equity offer announcement, and this increase persists
till
year
5.
to
than
0.20%
An F
test
19
indicates that the variances
1%
at the
1
than the
years
in
to
5 are significantly greater than the variance
Further, the earnings variance
level.
maximum
pre-offer variance
year
(in
each
in
-4).
The
of the post-offer years
in
The increased earnings
equity betas
findings from interquartile ranges
corroborates the increase
in
to a
few
asset and
documented above.
To evaluate whether
by other firms
in
have the same four
Research
Files.
price two
days
digit
increase
this
same
the
median earnings patterns.
that
volatility
-
greater
is
are consistent with the variance results, suggesting that the above results are not due
extreme observations.
year
industry,
in
cross-sectional earnings
we examine
volatility
experienced
is
the cross-sectional variance of industry
For each test firm, earnings changes are estimated for other firms
SIC code on the 1986 Standard and Poor's Compustat
The earnings changes
for
each comparison
prior to the test firm's offer
earnings changes are constructed
for
Industrial
firm are standardized
announcement and
industry
by
its
and
stock
median standardized
years -5 to 4.
Estimates of the cross-sectional variance and interquartile range of standardized
earnings changes
reported
in
of industry
for the industry
Panel B of Table
median earnings
6.
in
medians
There
is
years
experienced by the equity offering firms
earnings
5.4
no
in
to 4.
is
years surrounding
test firms' equity offers are
significant increase in the cross-sectional variance
The
post-offer increase in earnings volatility
therefore not due to an industry-wide increase
in
volatility.
Summary
Results of the
that the
risk tests
reported
sample firms experience a
in this
section are
summarized
significant increase in asset risk
in
Figure
1,
and a decrease
and show
in
financial
20
leverage subsequent
to equity offers.
The changes
equity betas.
matched by other
are not
in
The
net effect of these
changes
is
increase post-offer
to
asset betas, equity betas, and financial leverage of the offer firms
firms in their industries.
The average increase
in
equity betas
is
consistent with the magnitude of the average stock price decline at the offer announcement.
Increases
in
the cross-sectional volatility of earnings
corroborate the findings on asset and equity betas.
changes
offers convey information to investors on
6.
changes subsequent
These
the offering
to
findings indicate that primary equity
business
in offer firms*
risk.
DISCUSSION
The increase
in
asset
risk
and decrease
in
financial leverage
documented above
are
consistent with the implications of the capital structure models of Donaldson (1961), and
DeAngelo and Masulis [1980].
between costs
of financial distress
are likely to issue
firm's
common
business
risk.
about their firms' asset
To
proceeds.
offer
to retire
and
in
the probability of financial distress,
Managers' decisions
risk
increase and
validate this interpretation,
The stated uses
when
to issue
new
due
to
equity therefore
they perceive
an increase
in
the
convey information
leverage decrease to the market.25
we examine
of equity offer
the stated
proceeds, reported
to
in
and actual uses
of the offer
the Wall Street Journal and the
use the proceeds
to retire debt.
percent of the sample state that the primary use of the funds generated by the offer
debt (48 firms) or to increase the equity base (four firms).
sample
8%
[Managers therefore
interest tax shields from debt.
and the
prospectuses, indicate that a majority of firms intend
Fifty-six
the
predict that capital structure decisions reflect a trade-off
stock to reduce their firm's financial leverage
has been an increase
that there
They
of
firms state that the funds are to
be used
In contrast,
primarily to finance
new
only
27%
is
of
capital projects,
the firms report that the intended uses are for working capital (two firms) or
21
general business purposes
(five
9%
The remaining
firms). 26
sample
of the
do not
firms
disclose the intended uses of the funds.27
Several sample firms
plan
to
reduce leverage.
explicitly
mention that the proposed equity offering
For example, Gould Inc. states
in
its
annual report
part of a
is
for the offer year,
that:
emphasis this year on strengthening our balance sheet.
plan to reduce the level of total debt to capitalization from the current 39.7%
...we are placing special
We
to
below the
34%
...We (also) just
level.
with the
filed
SEC
a registration
shares of common stock. Dependent on market
conditions, we will probably proceed with this plan in late September or early
October.
Proceeds from the proposed financing will be used to increase the
company's equity base through the retirement of medium term bank loans and
short-term debt. (Chairman's letter to shareholders. Annual Report for the
period ending June 30, 1976).
statement
to sell
one
million
Value Line analysts also discuss the implications of equity offers
The most
frequently mentioned effect
flexibility.
For example, the Value Line report on Tenneco,
announcement states
offering of 3 million
leverage and increase
Inc.
subsequent
in
firms.
financial
to the equity offer
ratio
The company recently completed an
These were issued in the place of bonds to
under the 60% ceiling. ... the proceeds will be used to retire
common
shares.
Evidence on actual uses of the
May
offer
1,
1970).
proceeds
is
consistent with managers' stated
Figure 2 reports sample medians of net debt issues, net equity issue proceeds, and
capital expenditures for the offering firms in years surrounding the offers.
variables are standardized by
its
year-end
total assets.
For each firm these
Net proceeds of equity issues (the value
of issues less treasury stock acquisitions) are close to zero
contrast, the
sample
with equity this year.
short term debt (Value Line Report,
intentions.
in
for the
that:
Tenneco financed
keep the debt
the reduction
is
in
median proceeds from equity issues as a percent
years
-5 to -1
of assets
in
and
year
debt issues (short- and long-term debt issues less retirements) increase from
to 4.28
1
is
2%
6.3%.
of
in
Net
assets
in
22
year -5
the
to
5%
magnitude
in
of
year
-1.
which
is
year
In
comparable
sample firms switch from debt
net annual borrowing
is
there
is
to the
a sharp decline
increase
to equity financing
2%
stable at about
in
in
in
the offering firms" borrowing,
funds from equity issues, indicating that
this
Subsequent
year.
of assets.29
There
is
to the equity offer,
no evidence
of a
change
in
capital expenditures in the equity offer year.
7.
SUMMARY
This paper investigates the nature of the information conveyed by primary equity offer
announcements.
We
find that: (1) Offer
announcements convey information about
changes since they are accompanied by increases
leverage, the net effect of which
betas
(2)
is
is to
increase
asset betas, and decreases
in
equity betas.
On average
future risk
in
the increase
financial
in
equity
consistent with the average stock price reaction to the offer announcement.
The
information conveyed by equity offers
risk
do not experience
offer firms' industries
announcements do
These
not
when they foresee an increase
business
volatility
risk.
The
firms'
managers decide
in
volatility
information
to
Equity offer
issue equity and reduce financial leverage
of their firms'
Investors,
and equity betas upward,
findings of this
conveyed by
the
offer firms' future earnings levels.
earnings due
to
an increase
in
recognizing that managers have superior
information on their firms' prospects, interpret offer
The
(3)
in
stated reasons for equity offers and their post-offer earnings
support this interpretation.
the offer firms' asset
firm-specific since other firms
and leverage changes.
similar risk
convey new information about
results indicate that
is
announcements accordingly and
resulting in a negative
paper have implications
for
firms' capital structure decisions.
future
Miller
revise
market reaction.
theoretical
work on the
and Rock (1985) use a
23
single
model
to
analyze capital structure and dividend decisions and predict that both convey
information on future earnings levels.
While the findings of Ofer and Siegel [1987], and Healy
and Palepu [1988] confirm the prediction
earnings levels,
risk.
convey information on
paper finds that the information conveyed by equity
offers
is
future
about future
This suggests that separate models are necessary to analyze dividend and capital structure
decisions.
fVlajluf
this
that dividend decisions
The models
of
Donaldson (1961), DeAngelo and Masulis [1980], and Myers and
[1984] are broadly consistent with this paper's findings.
that there
is
scope
asset risk changes
in
for refining
these models by
equity offer decisions.
explicitly
However, our
results suggest
considering the role of systematic
24
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Asquith, Paul and David Mullins, Equity issues and offering dilution, Journal of
Economics
Financial
(1986): 61-89.
Brealey, R. and S. Myers, Principles of corporate finance, McGraw-Hill.
New
York, 1984.
DeAngelo, H. and R. Masulis, Optimal capital structure under corporate and personal taxation,
Journal of Financial Economics (1980): 3-29.
Donaldson, Gordon, Corporate debt capacity, Boston. Division
School, 1961.
Hamada, Robert
S..
The
effect
the firm's capital structure on the systematic risk of
stocks. Journal of Finance
Heaiy.
Paul
M.
initiations
common
(1972):13-31.
and Krishna G. Palepu, Earnings information conveyed by dividend
and omissions, Journal of Financial Economics (1988): 149- 175.
Ibbotson, R.G. and R.A. Sinquefield. Stocks, bonds,
Financial Analysts
Jain,
Research, Harvard Business
of
Research Foundation,
bills
and
inflation:
Charlottesville,
The past and
Virginia,
the future,
1982.
Equity issues and changes in expectations of earnings by financial analysts.
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Prem C.
Jensen, M.. Agency costs of free cash flow, corporate finance and takeovers. American Economic
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Masulis, Ronald and
Ashok Korwar, Seasoned equity offerings: An
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Journal of Financial
Masulis, Ronald, 1983,
The impact
Journal of Finance
Mikkleson, Wayne, and
(1983):
Megan
of capital structure
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firm value:
Some
estimates.
107-126.
Partch, Valuation effects of security offerings and the issuance
process. Journal of Financial Economics (1986): 31-60.
Miller.
Merton and Kevin Rock. Dividend policy under asymmetric information, Jpijrngl
Finance (1985): 1031-1051.
pf
Myers. Stewart and Nicholas Majluf. Corporate financing and investment decisions when firms
have information that investors do not have. Journal of Financial Economics (1984):
187-221
and D. Siegel, Tests of signalling models using expectations data: An application to
dividend signalling. Jnnrnai of Finance (1987): 889-911.
Offer, A.
25
Schipper, Katherine and Abbie Smith,
offerings:
Sfiare
Economics
price
(1986):
A comparison
effects
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Schioies, Myron, Market for securities: Substitution versus price pressure and the effects
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Clifford,
Financial
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Economics (1986): 3-29.
26
FOOTNOTES
Two other explanations have also been proposed. Jensen (1986) suggests an agency cost
1.
explanation for the negative nnarket reaction to equity offer announcements. Assuming that there is a
between managers and stockholders, he argues that the negative market reaction is
conflict of interest
due to investors' expectations that the increased free cash flows from an equity issue will be used by
managers for value-reducing activities. This paper assumes that managers act in the interest of
shareholders and therefore does not test this explanation. Another view is that selling equity causes a
However,
firm's stock price to fall because the demand curve for its shares is downward sloping.
theorists reject this view
level
and riskiness
of
its
by arguing
cash flow.
that the price of a security is
determined solely by the expected
DeAngelo and Masulis point out that in the absence of financial distress costs, capital structure is
determined by a trade-off between interest tax shields and other tax shields, such as depreciation and
investment tax credit.
2.
3.
Masulis (1983) provides evidence on this hypothesis for a sample of exchange offers.
4.
While Myers and Majluf's model assumes that the proceeds are used for a new investment project,
debt retirement, provided this has a positive net present value for
their analysis is also applicable to
shareholders.
Mikkleson and Partch (1986) use the following proxies: (1) the net amount of new financing
They
offer, (2) the size of the offering, and (3) the stated reasons for the offering.
conclude that their results do not support the hypothesis that stock issues convey information about a
Masulis and Korwar (1986)
firm's earnings prospects, assets-in-place or investment opportunities.
examine the relation between equity offer announcement returns and (1) the proportional change in
outstanding shares of common stock, (2) the offering-induced leverage change, (3) the pre-offerannouncement price run-up, and (4) the pre-offer-announcement stock return variance. The only
5.
provided by the
variable found to be related to the offer
announcement
return
is
the pre-offer price run-up.
Asquith and Mullins also examine secondary equity offers. This paper focuses on primary offerings
since it is possible that the nature of information provided by the two is different. To investigate this
Results of these
issue, we also analyze earnings and risk information conveyed by secondary offers.
6.
tests are
7.
discussed
briefly in footnote 25.
This restriction eliminates observations for repeat offer firms.
If
there
is
a systematic difference
between these observations and those in the sample, our results may not be generalized to all equity
offers.
There is no current theory that distinguishes between repeat and infrequent equity offerors.
8.
Risk-adjusted announcement returns are market model prediction errors for one day prior to and
The market model parameters are estimated
the day of the Wall Street Journal report on the offering.
using returns for the firm and the
9.
CRSP
equal-weighted market portfolio
Since equity offers occur throughout the
include earnings for
some
fiscal
in
days 101
year, the fiscal year earnings
quarters announced before the offer and
some
to
in
350.
the offer year
quarters after the
offer.
To
separate earnings before and after the equity issue announcement, the earnings tests also are
performed using annual earnings constructed from quarterly data collected from Compustat Quarterly
Files.
We construct annual earnings for year using earnings from the four quarterly announcements
27
subsequent
to the offer (quarters 1 to 4); year -1 earnings are constructed from the four quarterly
earnings prior to the offer date (quarters -4 to -1). Similarly, earnings for years -6 to -2 and 1 to 4
are constructed using earnings from quarters -24 to -5, and 5 to 20 respectively.
The results using
earnings defined this way are not materially different from those reported in the paper for fiscal year
earnings.
10.
We examine the cross-sectional relation between standardized earnings changes
and the equity offer announcement returns. The correlations are insignificant at the
in
years
10%
to 4,
level in
all
years.
Another source of earnings forecasts, commonly used by accounting researchers, is the IBES
We do not use this source because IBES forecasts are not available for many of our sample
Jain (1988) analyzes revisions in IBES forecasts for a recent sample of equity offers.
11.
database.
years.
We
12.
sample
equity
find that the
firms,
Value Line reports discuss the
offer
and
its
financial implications for
each
of the
indicating that their post-offer forecasts are likely to incorporate information from the
offers.
To ensure that
from the Value Line
13.
all
available forecasts are included
in
the analysis, reports are collected directly
Value Line reports are unavailable for 22 sample firms. The number of
quarters with forecasts available varies from firm to firm.
Seventy and 60 observations are available
in quarters 1 and 2 respectively; the number of observations declines markedly in subsequent quarters.
Thus, the results are not directly comparable across quarters.
The
14.
library.
coefficient of the quarter
quarters other than quarter
all
3.
forecast error
The
is
insignificant at the
coefficient for that quarter,
suggests that the negative forecast revision in that quarter
forecast error in quarter 0, and not equity offer information.
level,
The
15.
tests
10%
which
level in regressions for
is
significant at
the
5%
conveyed by the
reflects information
have been replicated using value-weighted market returns and also Scholes-Williams
Our conclusions are unchanged.
estimates of betas.
16.
The test is based on the sample distribution of the parameter differences.
parameter differences are independent across firms in the sample. The reported
overstated if this assumption is violated.
The mean estimate
17.
of
a
for the equity offer firms in
year
-1
is
0.0004 and
It
assumes
that the
test statistics will
be
statistically significant
consistent with the results of Asquith and Mullins, who report that
equity offering firms experience significant positive excess returns prior to the offer announcement.
The mean estimates of a for the other years are not significantly different from zero at the 5% level.
1%
at the
level.
This finding
is
positive pre-offer excess returns may cause the estimate of offering firms' equity betas in year
be biased downward. However, this bias, if any, does not appear to explain the reported increase
in year 1.
This is because the mean equity beta in year 1 is also significantly larger (at the 5%
level) than the values in years -3 and -2, even though estimates of a are not significant (at the 5%
level) in these years. The Z statistic for the mean increase in 3 is 3.14 for years 1 and -2. and 1.85
These
-1
to
in
beta
for
years
18.
We
19.
1
and
-3.
perform appropriate
statistical tests,
not reported
in
Table
5,
Ibbotson and Sinquefield (1982) report that the average annual
to verify
risk
this
statement.
premium
(the
return
on
28
common
stocks minus the return on treasury
average annua! return on treasury bills during
We
20.
bills)
changes
also estimate the valuation effect of risk
the above model.
The mean and median implied
during the period 1926 to 1981
period
this
was 8.3%.
The
was 3.1%.
each of the sample firms separately using
comparable to those reported above.
for
price declines are
The valuation
effect of the risk change is computed using firm changes in equity beta between
and -1, a market risk premium of 8%, and three alternative risk-free rate assumptions, 0%,
5% and 10%. Equity offer announcement returns are risk-adjusted returns for the day before and the
day of the Wall Street Journal report of the event.
Two measures of risk-adjusted returns are
computed, using pre- and post-offer market model parameters.
The results are similar for these
21.
years
1
variable definitions.
different
To examine the effect of using the simple valuation model, we re-estimate the correlations using 8
changes themselves rather than their valuation effects. The results remain insignificant.
22.
The mean
23.
results
do not change the primary conclusion
of the leverage analysis,
namely, that
leverage in year 1.
However, in contrast to the median
decrease in year -1 and no increase in year 2. For offer
firms' industries, the only difference in the mean and median result is in year 1.
While the median
leverage change in that year is insignificant, the mean leverage change is positive and significant at the
there
a significant decline
is
results,
mean
5%
level.
24.
This procedure
sample
in
offer firms'
results indicate a leverage
assumes that the distribution of standardized earnings changes is the same for all
and does not discriminate between changes in firm-specific and market-wide risk
Because of these limitations we view these tests as secondary to the return-based tests.
firms,
changes.
Asquith and Mullins (1986)
find that secondary equity offer announcements, which do not change
structures, also produce a negative market reaction similar to that for primary
Since the capital structure interpretation of primary equity offers cannot be applied to
secondary offers, we expect the information conveyed by the two events to be different. To test this,
we briefly examine risk and earnings changes surrounding 85 registered secondary offers from the
period 1963-81. The sample comprises all secondary offers examined by Asquith and Mullins which
satisfy the same criteria used to select primary offers in our study.
In contrast to the findings for
primary offers, we find that secondary offer firms have lower earnings, but no changes in risk in the
25.
firms'
capital
offerings.
post-offer period, confirming that the information
26.
Twenty-one
new
that they plan to
use the proceeds
We
use the proceeds for new capital expenditures
whereas only four firms indicate
unrelated business expenditures.
for
separately examine post-offer asset beta changes for firms that state that they intend using
new
investments, and to retire debt.
groups are not significantly different
29.
different.
projects are expansions of current businesses,
the proceeds to finance
28.
is
of the firms that state they plan to
indicate that the
27.
conveyed by these two events
The sample
at
selection requires firms to
Industry net borrowing ranges from
sharp decline
year period.
in
10%
the
year
0.
one
Net equity offers
have no equity
to
The
post-offer beta
changes
for the
two
level.
offers in years -5 to -1.
two percent of assets
for the
sample
in
years -5 to 4 and there is no
zero throughout the ten
firms' industries are
Table
Distribution
in
of
primary stock offerings by year
for 93 sample firms*
the period 1966 to 1981
Number
Year
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1
of
firms
2
1
3
3
7
8
3
1
1
8
10
1
1978
1979
1980
21
1981
13
5
6
Percent of
Summary
statistics
on changes
m
earnings per share as a percentage of
initial
equity price for years surrounding primary equity offer announcements^-''
Period
to
relative
equity
offer
Panel A:
Raw
Year
5
-
Number
of
firms
earnings changes
Third
First
Meanc
quartile
f^edianc
quartile
Table 3
Summary statistics on analysts' earnings forecast errors
and forecast revisions as a percentage of initial equity price
for quarters following primary equity offer announcements^
Period relative
to
equity offer
Number
of
firms
Third
First
Meanb
quartile
Median^
quartile
Analysts' forecast error:
Quarter
71
Analysts' forecast revisions:
Quarter
0.21 %c
-0.03%
0.1
0%c
0.41%
Summary statistics on market model risk parameters for firms announcing
primary equity offerings and their industries in years surrounding the offers^.**
Year
-2
EQU'ty offer firms:
relative
to
offer
-1
announcement
1
Summary
statistics on asset betas and financial leverage (or (irms announcing
primary equity offerings and their industries m years surrounding the otfers^b
Year
-2
EQVUy
Qff?r
firms:
relative
to
offer
-1
announcement
1
Table 6
Summary
on cross-sectional
earnings per share as a percentage of
statistics
announcing primary equity offerings
Period
to
Panel A:
Year
Number
relative
equity
offer
Raw
of
observations
in
variability
initial
92
92
92
92
93
93
93
91
88
changes
in
years surrounding the offers^
Estimated
variance
earnings
91
of
equity price for firms
0.06«/
Interquartile
range
Figure
Summary
1
median changes in asset betas, financial leverage, and equity betas for
equity offer firms and tfieir industries in years surrounding offer announcements
of
Panel A: Equity
0.15
•
offer firms
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